Litigation

Usana Health Sciences knows it products are being sold illegally in China

By Tracy Coenen

Almost thre years ago, Barry Minkow and Fraud Discovery Institute released a report on Usana Health Sciences (NSDAQ:USNA), listing ten red flags of fraud he and his team (which included me) uncovered about the company. The report criticized the company’s business model, essentially calling it a pyramid scheme in which recruiting is the focus (rather than the actual sale of products) and pointing out how little money Usana distributors actually make:

The Company might want to talk down this marketing point, for the promise of exponential income growth belies reality?the average income for North American Associates in 2005 was $802.62.

Indeed, Usana is just like all other multi-level marketing companies: Almost everyone who participates loses money. It doesn’t take a lot of guesswork to figure this out. Usana’s own numbers prove this reality.

Following the first report, several updates were issued. It was determined that Usana executives and board members had been lying about their credentials. FDI demonstrated how little product Usana reps are actually selling. And FDI criticized Usana for knowing about illegal sales of its products in China (where multi-level marketing was illegal), and actively participating in the process.

Usana filed a lawsuit against Barry Minkow in late 2007, but eventually the lawsuit Usana filed against Minkow was settled. First the court made Usana pay Barry Minkow’s legal fees. It was clear that Minkow was winning the court battle. Then Usana came to its senses and dropped its lawsuit after agreeing to pay Minkow an undisclosed sum of money.

Little has been heard about Usana since, but it’s time to revisit the issue of sales in China. Right before the release of FDI’s report on Usana sales in China, the company acknowledged what a lucrative market China is:

For us, China is a wait and see, with the laws the way they are and currently they are throwing more laws and getting stricter.  We see that as a very difficult environment to be successful.  We are waiting to see if some of the other companies crack the code and come up with a way to be successful there.  We have not seen a lot of success from our competitors.  We do not want to jump into that situation that has not been successful for others.  So we are going to have things going slowly in the sidelines, keeping an eye on it and watch it till we believe it is a potentially successful market for us and then we will pursue with great speed.

Minkow released his report on illegal selling of Usana products in China, and Usana was unusually quiet about the issue. No press releases. No discussion of it on conference calls. The issue died rather quietly.

But new information suggests Usana is well aware of the illegal selling of its products in China. An internal compliance training document shows that Usana knows all about illegal sales:

IV. What is the biggest market that buys our products that we are not eligible to operate in?

i. Once again I couldn?t give you an exact answer on this. Since I work with our Asian markets, I know that a large sum of product ends up in China, but I?m sure product somehow gets shipped to other unauthorized markets as well…

Of course the company can distance itself from these sales by simply calling the participants “rogue associates”:

VI. Question #6: Which market experienced the greatest sales growth from 2007-2008, and by how much?
i. Answer: East Asia (Hong Kong mainly and a little Taiwan), increased by almost $13 million.
ii. Things to look out for ? rogue associates in Mainland China, trying to order US product.

Is Usana doing anything to cut down on these illegal sales? It’s hard to know, but they certainly haven’t addressed the issue publicly. Why would Usana choose to not enforce the rules with its associates? Probably because the market in China is so huge and there is a lot of money to be made. The company doesn’t have to take any serious actions if regulators aren’t pushing the issue. They can sit back and collect their money, knowing that someday illegal sales in China might come back to bite them, but knowing that in the meantime they’ve made enough money from it to make whatever small punishment (if any) they receive worthwhile.

Why has Barry Minkow gone after multi-level marketing companies and why does he continue to go after MLMs? Because people are literally losing billions of dollars each year to these schemes which promise riches and deliver financial devastation to almost everyone who participates. People sign up with the intention of making money (maybe even just a little bit) and end up spending far more than they ever earn.

Are you one of those who thinks Barry Minkow is just a hack… a no good felon who is up to no good? His track record speaks for itself. He has been responsible for uncovering almost $2 billion of fraud for law enforcement and stopping fraudsters in their tracks.

Full post as published by The FRAUDfiles Blog on January 21, 2010 (boomark / email).